CA Trust, Estate & Probate Litigation

CA Trust, Estate & Probate Litigation

It You Got ‘Em…Flaunt ‘Em: A California Trustee’s Duty to Use Special Skill

Posted in Trust Administration, Trustee Breach of Trust, Trustee Removal

What's your-2

“If you got it, flaunt it baby!” That’s one of my favorite lines from the movie The Producers by Mel Brooks. The same can be said of California Trustees (although not referring to their looks of course). For Trustees, if you have a special skill you are expected to use them.

For example, if you are an expert in investing, then you have to use those skills for the advantage of the Trust. And you will be judged based on your increased skills if anything should go wrong.  If you are a CPA or lawyer and you undertake Trusteeship of a California Trust, then you will be expected to use your professional skills to administer the Trust.

For example, lawyers should have a higher degree of knowledge of the Trust laws, especially Trust lawyers. So when a Trust lawyer acts as Trustee, those skills must be used. And if anything goes wrong, the Trustee will be judged based on a higher standard of skills than an ordinary Trustee.

Having a Trustee with special skills that helps in Trust administration is a great idea. For example, a Trust that is heavily invested in commercial real estate would do well to have a Trustee who is skilled in commercial real estate. Settlors oftentimes look for this type of expertise when selecting a successor Trustee.  Or at least they should look for this special skill when selecting a Trustee.  After all, many Trust lawsuits involve Trustees who did NOT handle Trust investments properly because they simply did not know what they were doing.

But that extra level of skill comes with a catch—a higher expectation under Trust law. So if you are an expert, you must be aware that your expertise can be a benefit to the Trust, or a burden to you if things go wrong.  You are not going to be judged as your average-Joe Trustee, but as your highly skilled Trustee.

The best protection against a lawsuit for a skilled Trustee (or any Trustee for that matter) is to have a process in place that you use to mange the Trust assets and make decisions.  The exact details of the process are not as important as having a process at all.  So many individual Trustees will make decisions and invest assets without any written game plan.  When investments take a dive, the Trustee is immediately accused of making a mistake and with no written process in place, the Trustee has nothing to point to as being the basis for the decisions that were made.

Having skills is a mixed blessing.  It is great for the beneficiaries, when those skills are put to good use managing the Trust assets.  But when things go wrong, those same skills may create a higher threshold to escape legal liability than would otherwise apply.

The Downside Of Co-Trustees In California Trusts

Posted in Trustee Breach of Trust

Is your co-trustee

Acrimony between Co-Trustees can raise significant problems. Co-Trustees each have a duty to participate in the administration of the Trust (PC 16013). A Co-Trustee also has a duty to prevent the other Co-Trustee from committing a breach of Trust, and compel a Co-Trustee to repay damages caused by a breach of Trust.  That can be a tall order when dealing with a difficult Co-Trustee.

Let’s start with participation. Each Co-Trustee has an affirmative duty to participate in the administration of the Trust. That makes sense in theory because there is no reason to have two or more Co-Trustees if any of them refuses to participate (might as well just name one Trustee).  But in practice it may be difficult for two Co-Trustee to participate, especially if they do not get along. This happens quite a bit when two siblings are appointed as Co-Trustees. There can be (in some families) a built-in animosity between the parties that causes the Trust administration to stand still.

Worse yet, if one Co-Trustee actively tries to exclude the other Co-Trustee from participating, then this duty to participate is impossible to meet. In most cases where two or more Co-Trustees cannot get along, one of them has to go.

This brings us to the next part of the duty, to stop a breach of trust. That can be a real problem when you have a runaway Co-Trustee. Difficult Co-Trustees are not so easy to control, let alone preventing a breach. In most cases, the only way to stop a breach is to file in Probate Court and seek an order against the Co-Trustee. And as long as you continue to be a Trustee, you have an affirmative duty to take action—including Court action—if necessary.

The same is true of a Trustee’s duty to force a Co-Trustee to pay back any damages caused by a breach. In most cases, Court action will be required to accomplish this duty. Most Co-Trustees who cause harm to a Trust are not going to pay for the damage willingly. It does happen at times, but more often it is a lawsuit waiting to happen. But happen it must, because a Co-Trustee has a duty to seek the repayment of damages.

It is not so easy being a Trustee, and that is especially true of Co-Trustees. It is important to know your duties, and then keep a watchful eye on your Co-Trustee.

The Buck Stops…Where? California Trustees duty NOT to delegate

Posted in Trustee Breach of Trust

harrytruman

Funny thing about Trustees, they are expected to seek help, just not too much help.  Generally, Trustees are not allowed to delegate their duties (see Probate Code section 16012).  The rules state that anything the Trustee can “reasonably” be required to personally perform cannot be delegated.  And the Trustee can never delegate the entire administration of the Trust to someone else.

Where a Trustee does delegate some matter to an agent or co-Trustee, the Trustee still has a duty to supervise that person in the performance of the delegated matter.  That means a Trustee cannot simply delegate and forget about it.  The Trustee is required to oversee the agent and make sure that the job is being done in the best interests of the Trust.

There is one big loophole this the nondelegation rule: investment and management decisions.  Under the Uniform Prudent Investor act, a Trustee has the power to delegate certain financial decisions (see Probate Code section 16052).  This exception allows a Trustee to delegate financial decisions “as prudent under the circumstances.”  But the Trustee retains the duty to (1) select a good agent to act for the Trust, (2) establish the scope and terms of the delegation, and (3) periodically review the agent’s performance.

Here’s where things get interesting.  Where a Trustee has properly delegated financial decisions to an agent, the Trustee CANNOT be held liable for those investment decisions.  That can be a shocking result for a beneficiary who seeks to hold a Trustee liable for bad investment decisions.  Of course, the agent to whom investment decisions were delegated can be held liable for bad investment decisions.  But that just means the beneficiary may find himself suing a large financial firm rather than the Trustee.

The good news is that financial advisors rarely will agree to accept delegated financial responsibility for a Trust–primarily because of the liability involved in doing so.  Yet, so often Trustees who make bad investment choices will try to pass the buck to the financial advisor.  It then becomes the beneficiaries job to determine whether the investment power was delegated or not.  It could mean the difference between suing a Trustee or suing a large financial institution.

If you happen to be a Trustee, choose your delegation wisely.  Even with the job being handed off to someone else, you may still be on the hook for a bad decision.

 

Duty To Defend: A California Trustee Must Defend The Trust

Posted in Trustee Breach of Trust, Trustees & Beneficiaries

bakery

As Trustee, you have a duty to defend the Trust in actions and lawsuits filed against it. This duty is the flip side of a Trustee’s duty to enforce claims, where a Trustee must sue to enforce a debt owed to the Trust.

The duty to defend requires the Trustee to take all reasonable action to protect and preserve the rights of the Trust. If a lawsuit is filed against the Trustee, then the Trustee must act to defend that lawsuit. Of course, the Trustee is allowed to use Trust monies for this purpose. And we generally want Trustees to do that so a proper defense can be paid for by the Trust.

Unfortunately, the Trustee’s ability to pay for a defense from the Trust funds can work against a beneficiary who is suing the Trustee. It is one thing for the Trustee to defend a lawsuit from an outsider, but to use Trust money to defend a lawsuit brought by a beneficiary is not so good. Yet that is the scenario faced by nearly every beneficiary suing a Trustee.

The court does have the power to surcharge a Trustee who wrongly uses Trust funds to defend themselves.  A surcharge is just a judgment against the Trustee personally that must be paid to the Trust.  While this sounds promising to suing beneficiaries, it presents two large problems: (1) this determination only comes at the END of a lawsuit (meaning a Trustee can use money during the suit), and (2) courts rarely make a finding of personal surcharge.  Why no surcharge?  Because the court has wide discretion to decide when and if the Trustee wrongly spent Trust money on legal fees.  And California courts tend to be conservative when requiring a Trustee to pay back legal fees.

Bottom line: only in the most egregious cases will a personal surcharge against a Trustee be imposed.  Of course, you can still ask for a surcharge, just don’t count on that happening any time soon (if it happens at all).

In the meantime, any third-parties who sue the Trust are in for a fight…assuming the Trustee lives up the the very important duty to defend the Trust.

When You Must Sue: Trustees’ Duty to Enforce Claims

Posted in Trustee Breach of Trust, Trustees & Beneficiaries

The Enforcer

You have no duty to sue, it’s true. If someone owes you money and you don’t want to go to the trouble of collecting it, or suing for it, you have the right to just let it go by the wayside. It ‘s your money and you have the right to give it away.

Not so with Trustees! Trustees are required to enforce all legally enforceable claims a Trust has against any party. If there is money owed and the debtor refuses to pay, the Trustee has to take action. If there is a mortgage on real property and the payments stop, then the Trustee must foreclose.

The Trustee does not have the luxury of allowing a debtor to walk away from a Trust debt. Why? Because the Trustee is in charge of other people’s money. So even though the Trustee personally may not want to sue, there is an affirmative duty under California law for the Trustee to take action.

The duty to enforce claims does not mean, however, that a Trustee must spend more to enforce a claim than it is worth. For example, if someone owes the Trust $100, it makes no sense to spend $20,000 on legal fees to collect it. It may make some sense to write a letter, make some calls, or file a small-claims lawsuit. But that all depends on the amounts involved.

The bottom line: if you are a Trustee you have a duty to stand up for the rights of the Trust beneficiaries.  It is the beneficiaries’ money, so Trustees have a duty to sue.

Explain Yourself: Trustees’ Duty To Identify Trust Property

Posted in Trustee Breach of Trust, Trustees & Beneficiaries

Identify

Quick piece of advice: if you do not like bookkeeping, don’t be a Trustee. It takes a good deal of time and effort for a Trustee to properly keep Trust assets, separate, and identified. Not only that, but every expense you have, every bill you pay, must be documented with a receipt.

Why all the details? It mainly is required because you are managing someone else’s money. That means at some point you will be called upon to account for your actions as Trustee. And any good Trust accounting will show the beginning assets, the income, the expenses, and the assets on hand at the end of the accounting period. While it is not difficult to keep assets separate and identified, it can be time consuming.

But in the end it is the best way to prepare an accounting. If you start moving Trust assets around and mixing them with your own money, then it can be quite difficult to account for your actions. Not only that, the beneficiaries will demand to see your personal account statements if you have commingled funds into your personal accounts.

If you are crazy enough to take on the thankless job of being a Trustee, then do yourself a favor and make sure your money and the Trust money remain separate and apart.

Working For a Living: Trustees’ Duty To Make Trust Property Productive

Posted in Trustees & Beneficiaries

Putting Assets to work

Trust property must be productive. But what does that mean exactly? Well if you have rental real property in a Trust, it needs to be rented. If you have cash in a bank account, it needs to be invested. If you have a car that no one drives, it needs to be sold. And if you have pink flamingoes, well you get the idea.

The point here is that Trust property cannot simply sit around gathering dust. As a Trustee of a California Trust, you have an affirmative duty to take control of Trust property and put it in a position to produce something. Assets have the potential to produce income, appreciation, or both. And having the assets grow and generate income is one of the basic requirements for any Trustee.

Luckily, the Trustee is not expected to know how to do all of this on his or her own. The Trustee has the right to hire professionals to help advise on decisions as to what to do with Trust assets. For example, if you have rental real estate, the Trustee can hire a property manager to rent it. Or hire a real estate broker to list the property for sale. If you have cash assets that need to be invested, then a certified financial planner can be hired to advise on a proper investment portfolio.

And if the Trust currently has invested assets that are not doing well, then the Trustee has a duty to sell the bad stuff and buy into a better portfolio.

In the end, it is the Trustee’s responsibility to build the Trust assets into something better for the beneficiaries to enjoy in the future.

A Precious Resource: California Trustees Must Take Control And Preserve Trust Property

Posted in Trustees & Beneficiaries

Preserve

One of the most important financial duties of a Trustee is to take control of all Trust assets and act to preserve those assets from loss. This can mean different things in different situations. For example, if you take over a Trust with a volatile stock portfolio, you may have a duty to sell the risky stuff quickly and preserve what is there for the beneficiaries.

When it comes to real estate, you have a duty to secure the property, purchase insurance, and either make the real property productive by renting it, or sell it for the fair-market-value.

And the list goes on and on depending on the assets involved and the problems encountered. The one consistent in administering Trusts is that nothing is ever consistent. Each Trust presents its own problems and roadblocks. The key, however, to living up to this duty is to take the risk out of the equation. Just because the Settlor invested in risky assets does not mean you are allowed to do so as Trustee. Or just because the Settlor allowed a house to sit vacant with no renters and no insurance does not mean you can do the same.

As Trustee you have an affirmative duty to act to protect and preserve Trust assets. You have to lock up the Trust property and keep it safe until the time comes to give it out to the beneficiaries.

The best approach is to gain control of all Trust assets, and then confer with a financial professional to determine the best way in which to invest or hold the assets until time of distribution. For some Trusts, the time to distribute comes quickly, for others it comes later. Either way, a proper plan is required to ensure the assets are preserved for their ultimate owners—the beneficiaries.

Time To Object To Your California Trust Or Will Lawsuit

Posted in Litigation, Trust Contests, Trustee Breach of Trust, Trustee Removal

Time's Up!

When faced with a Probate Court Petition that you do not agree with, you must object. Luckily, in California you have some leeway on when you can object because our Probate Code allows interested parties to object orally at the initial hearing. In other words, you technically do not have to have a written objection before the initial hearing date.

But that does not mean that objecting orally is the best way to go. In most cases, we prefer to file a written objection at least five days before the hearing date to ensure that the objections are preserved.

Probate court is a court of equity—meaning the court can take action, issue orders, and approve petitions anytime there are no objections. Even when there are objections the court can overrule the objections and issue orders—although the law requires a trial at which to present evidence to decide most probate court matters.

The point is that if you fail to object in writing, and if you fail to show up on time at the probate court hearing, then you may be out of luck. Once the court issues orders or approves a petition, it takes a good deal of work to overturn the result—assuming you can overturn it at all.

If you are going to rely on an oral objection at a probate court hearing, then be sure to show up on time. If you want to play it safe, then file your written objection well before the hearing date so the judge will be sure to read it.

Trustee: Your California Legal Release May Be a Trap…

Posted in Litigation, Trustee Breach of Trust, Trustee Removal

Release Trap

  • The waiver and release problem

The Trustee wants to be done with the Trust administration and decides to have the beneficiaries sign a waiver and release so a final Trust distribution can be made. But waivers and releases are not always the best way to proceed in Trust matters because they can be challenged and overturned by a beneficiary after the Trust assets are distributed.

The law places a heavy burden on Trustees to ensure releases are not obtained unfairly. Since Trustees are in a position of power over beneficiaries (and control the purse strings of the Trust), any waiver or release obtained from a beneficiary in favor of a Trustee is suspect.

  • How waivers and releases fail

For starters, Probate Code section 16004.5 states that any release that is conditioned on a beneficiary receiving an otherwise required Trust distribution is invalid. And that scenario happens all the time—a Trustee demands a signed release before making a distribution. That is a clear recipe for disaster because the release will fail and a future lawsuit will occur.

Furthermore, Probate Code section 16464, provides more ways in which to set aside a release, which include:

  1. the incapacity of the beneficiary,
  2. where a release was obtained by a bad act of the Trustee,
  3. where the release involves a bargain that is not “fair”, or
  4. where the beneficiary was not fully informed of his rights and all the necessary material facts.

That’s a lot of ways out of a release!

  • So how do you properly end a Trust administration?

Since a release can be overturned many different ways, the best approach is to seek court approval of a Trust accounting because that closes the door to future lawsuits by the beneficiaries without any doubt. But if an accounting is out of the question, then at least approach a release in the best way possible.

First, never condition a release on the distribution of Trust assets. In fact, make a preliminary distribution of assets BEFORE asking for a release. That will prove that the Trust distribution was not conditioned on a distribution of Trust assets.

Second, have the beneficiary review the release with a lawyer of their choosing so they cannot complain later of not understanding the implications of the release.

Third, disclose as much information about the Trust and Trust assets to the beneficiary before asking for a release. Since a release can be set aside if the beneficiary was not fully informed of all rights and material facts, it is imperative that the Trustee disclose all known information to a beneficiary before asking for a release. And the disclosure should be done in writing so you have proof of what was disclosed.

  • Don’t sign what you don’t understand

If you are a beneficiary and have been asked to sign a release or waiver under suspicious or unfair circumstances, do not sign anything until you have a lawyer review the release with you. This is especially true where the Trustee conditions a Trust distribution to you on your signing a waiver and release.  While there are ways to overturn a release, you do not want to have the burden of doing so if you don’t have to.

  • The bottom line

Court-approved accountings are the best protection a Trustee can have against later beneficiary lawsuits. But if you want to go the waiver and release route, at least be sure to follow the rules and create a waiver and release that is likely to be upheld if you are ever sued by a beneficiary in the future.

 

 

.